4 ways to tailor your portfolio for the perfect fit
A portfolio is like your wardrobe - it's a collection of handpicked pieces that fit your needs, profile, and preferences. You have the basics, such as stocks, bonds, unit trusts. Probably a few 'adventurous' pieces, like commodities or FX. And of course, a reliable go-to for any situation, cash.
- Picking asset classes for your portfolio
Every portfolio is made up of a variety asset classes. As each class performs differently in the same market environment, you should invest in multiple classes to reduce the risk that any set of conditions will hurt your entire portfolio performance.
For example, each "stocks' class can be made up of stocks, equity unit trusts and stock-related, just as 'shirts' come in many colors and designs.
Each asset class has a weight, or the percentage of the total portfolio value. So, if you've IDR30,000,000 worth of stocks in a IDR100,000,000 portfolio, the weight of stocks in your portfolio is 30%. The relative weights of individual asset classes, or asset allocation, is tailored to you depending on your risk preference.
Rebalancing asset classes: Stay true to your styles
Over time, you might find the make-up of your wardrobe changing. One day, you may realise that you have too many white shirts, or perhaps you’re running out of casual wear for the weekend.
It happens with portfolios too. But unlike your wardrobe it can happen without you realising it, due to asset classes performing differently in the same market.
Let’s say you have an allocation of 50/50 stocks and bonds. If the stock market performs phenomenally, the value of your stocks will rise in relation to bonds. This means your portfolio no longer fits your risk profile and needs to be rebalanced:
We start with an equal value of bonds and stocks.
When a strong stock market increases the value of stocks.
Your portfolio risk become higher than your threshold.
To restore original allocation: sell stocks, buy bonds.
In reality, it’s a much more complex task. You’ll have to consider the risk levels of individual assets to buy and sell, to maintain your preferred allocation without changing your portfolio’s risk profile.
Avoid concentration risk: not too much of a good thing
When it comes to your wardrobe, too many of the same piece may make your ensembles less versatile.
Similarly, with your portfolio, it’s best not to have too much of a single asset, for instance a particular stock. Any movement in the asset could have a disproportionate effect on your portfolio. This is called concentration risk.
One rule of thumb is the 5% rule. You don’t want any stock, mutual fund, or any other security to exceed 5% of your total portfolio value. So, if market gains in one security pushes it above 5%, sell some of it and buy more of another.
Get a portfolio manager: let the pros pick your look
If you've ever had a style consultant assemble a wardrobe for you, you'll be impressed by their eye for pieces that look just right.
In investing, you can leave it to the financial experts to handle the most important aspects of rebalancing for you. These financial experts specialise in researching, building, and managing portfolios.
DBS Treasures has a team of financial experts who can personalise your wealth management strategy according to your aspirations and risk profile, and consistently communicate to seize the momentum. This team of experts is also supported by the digital innovation of Portfolio Advisory Enablement Tool that can optimise your portfolio quickly and accurately in the dynamic market.
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